Offshore support cos see drop in market value

Sector Loses One-Third Of Its Value Despite Good Q3 Numbers

IF YOU believe higher stock prices inevitably follow a robust profit growth, the fate of India’s offshore support services sector defies this conventional wisdom. The sector has lost nearly one-third of its market value since the beginning of 2009 despite companies in the sector tripling their combined net profit during the last quarter of 2008.
The contrast could get even more puzzling if we compare this with the benchmark Sensex, which has lost only 10.1% in 2009 despite a disappointing performance by much of India Inc in the same quarter — an ETIG analysis shows India Inc’s net profit tumbled by more than 48%.
Aban Offshore’s net profit jumped fourfold to Rs 256 crore in the December 2008 quarter, but failed to prevent its market capitalisation plunging 57.2% since the start of 2009 to Rs 1,194 crore. Similarly, Shiv-Vani Oil & Gas too posted a strong 43% growth in its bottomline during the period, but saw a 29.3% drop in its market value during the same period.
Some companies across the sector did well in the last quarter — Jindal Drilling almost tripled its net profit and Dolphin Offshore posted a five-fold jump in profit. However, only Seamec and Great Offshore saw their market value improve.
The reason for the particularly poor performance on bourses is the negative perception in the market about the outlook for this sector. With crude oil prices falling, some global petroleum majors have declared cuts in spending on exploration and production this year, which could severely impact these services.
The fact that many of these companies have borrowed funds and bloated their debt-to-equity ratio (DER) does not help them either.
Aban Offshore’s consolidated debt was 16 times its equity at the end of March 2008. For Dolphin Offshore, DER stood at 2.2. For Garware Offshore, it was 1.4 and 1.1 for Great Offshore and Shiv-Vani Oil. Seamec and Jindal Drilling were the only two companies in the group to have low DER. The industry is also a victim of simple demand-supply economics.
“With crude oil prices crashing, highcost exploration projects are no longer economical. Hence, the demand for rigs is slackening, while many new rigs are ready to join the global fleet,” says RK Mehrotra, executive chairman of Foresight Group, a $500-million UK-based offshore drilling firm. Big Indian exploration companies are yet to cut spending, providing the services sector some respite. But it may not be for long. “Charter rates of rigs in India have not fallen so far. Still in the next 6-12 months, rates are bound to soften,” says SN Ajmera, chief financial officer, Jindal Drilling.